International Economics

A Heterodox Approach

Hendrik Van den Berg

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317370659
• Edition: 3
• Topic: Business
• Subtopic: Business General
• Index: Business

Now in its third edition, Hendrik Van den Berg's International Economics: A Heterodox Approach covers all of the standard topics taught in undergraduate international economics courses. Written in a friendly and approachable style, this new edition is unique in that it presents the key orthodox neoclassical models of international trade and investment, while supplementing them with a variety of heterodox approaches. This pluralist approach is intended to give economics students a more realistic understanding of the international economy than standard textbooks can provide.

Changes to the new edition include:

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• updates throughout to reflect recent world events, including coverage of trade negotiations and the Greek crisis;
• expanded discussion of pluralist approaches with more coverage of alternative schools of thought;
• discussions of the growing financialization of global economic activity;
• additional real-world examples;
• increased coverage of environmental issues; transnational corporations and their behavior in the international economy; the difference between international investment and international finance; and monetary history;
• a consolidated and updated chapter on international banking.

This book also maintains a broad perspective that links economic activity to the social and natural spheres of human activity, with emphasis on the distributional and environmental effects of international trade, investment, finance, and migration. Chapter summaries, key terms and concepts, problems and questions, and a glossary are included in the book. A Student Study Guide and an Instructor's Manual are available online.

PART I

Introduction to International Economics

CHAPTER 1

Interdependence!

[T]he sea brought Greeks the vine from India, from Greece transmitted the use of grain across the sea, from Phoenicia imported letters as a memorial against forgetfulness, thus preventing the greater part of mankind from being wineless, grainless, and unlettered.

—Plutarch (A.D. 100)

1.1 Introduction

China’s rapid economic growth in terms of gross domestic product (GDP) per capita has been widely described as a major economic development success of the last 25 years. According to official statistics, China has achieved annual growth rates of over 8 percent since the late 1970s. At such high growth rates, the power of compounding led per capita income to double in less than ten years and quadruple in less than one generation. China contains one-fifth of the world’s population; its rapid growth in material output means that a very large percentage of the world’s poor people have experienced improvements in their standards of living.

The economic development of the Chinese economy cannot be fully described by the simple compounding of annual growth rates of GDP, however. The process of economic development is a complex process that depends on the actions of many people individually and collectively, the institutional framework that guides human activity, and the natural environment that supports human activity. And as we will describe throughout this textbook, the performance of national economies depends on how it is linked to the other economies of the world. The complexity of economic activity is nicely illustrated by the recent experience of the town of Jinfeng, situated along the lower Yangtze River in China.¹

A decade ago, at the start of the twenty-first century, every morning more than 30,000 of Jinfeng’s workers walked or bicycled to an array of industries paying wages equal to about US$0.50 per hour. Compared to working on small farms in their villages, these wages constituted a substantial increase in real family income, which is why so many workers flocked to cities like Jinfeng. Among Jinfeng’s many industrial firms was the Shagang steel mill, which opened in 2002 after being transported, piece by piece, from the Ruhr Valley of Germany. The Ruhr Valley was until recently the center of Germany’s steel industry.

In the early 2000s, the German steel conglomerate ThyssenKrupp faced strong foreign competition and new environmental regulations to combat climate change, health hazards, and other negative consequences of pollution. ThyssenKrupp therefore began selling off its ageing steel manufacturing plants. But it did not sell the plants to new owners, who would continue operating them in Germany. Rather, it ended up selling the plants to Chinese entrepreneurs who sent work crews to dismantle the equipment and move it to China, where labor costs were a tiny fraction of Germany’s. ThyssenKrupp had estimated it would take three years to dismantle the plant, but the Chinese work crews sent to Dortmund by Shagang finished the dismantling in just one year. The Chinese workers labored seven days a week for many more hours per day than German labor law allowed but, somehow, the German government looked the other way. Today, the plant produces steel at much lower cost in Jinfeng, and this steel is used to produce many Chinese products that are shipped all over the world, including to the wealthy German market. Because of the relocated steel plant in Jinfeng and dozens more like it throughout the country, China is now the world’s biggest steel producer, well ahead of the once-dominant German steel industry.

The example of Jinfeng suggests that international trade and accompanying international investment are an intimate part of Chinese economic development. Indeed, many economists position international trade as an important generator of economic growth. But further information suggests that the Jinfeng plant is not necessarily a positive development for China or the world. For one thing, China’s steel mills, and the coal-fired power plants that provide the electricity that powers the plants, have also produced the massive greenhouse gas (GHG) emissions that pushed China past the United States in 2007 as the largest emitter of the GHGs that cause global warming. China was also releasing into its air more than 26 million tons of sulfur, the pollutant that causes respiratory problems for humans, and acid rain, which contaminates water supplies—about two and one-half times as much sulfur as the United States emitted in 2005.

Note that in the case of Jinfeng, German GHG and sulfur emissions were transferred to China when the ThyssenKrupp plant was moved. So, while Germany proudly confirmed that it was on schedule to reduce its greenhouse gas emissions by 40 percent by 2020, its former steel mills were increasing China’s (and global) emissions. One study attributes 400,000 premature deaths in China to air pollution. Evidence shows that China’s sulfur emissions and other pollutants also travel across the Pacific Ocean and now account for nearly 15 percent of California’s air particles allowable under U.S. environmental laws.²

We clearly live in an integrated international economy, in which one country’s economic activity affects the well-being of people in other countries in a variety of ways. The $0.50-per-hour wages paid in Shinfeng may be attractive for workers with few options in China’s rural communities, but in the integrated global economy the low Chinese wages and poor working conditions have put severe downward pressure on wages and working conditions in other countries. According to the British-based Catholic Agency for Overseas Development (CAFOD), the willingness of Chinese workers producing high-tech computer products to work 16-hour days in factories with unclean air, high noise levels, and dangerous machinery greatly reduces production costs on China. Workers also often live in company dormitories, and they do little more than work and sleep for months on end. All firms in the international market must compete with Chinese manufacturers and their low labor costs.

For example, Mexican factories producing for the U.S. market compete directly with Chinese factories. This is why, in the early 2000s, a Mexican labor activist complained that “[l]ast year, the average pay for production line workers was a not very generous 500 pesos [about US$45 a week]. This year, most people are being offered 450 pesos.”³ She claimed that Mexican working conditions were deteriorating because workers were threatened with dismissal by firms that have the option of outsourcing part or all of their manufacturing to subsidiary and third-party manufacturers in China. The human cost of such competition can be devastating in many ways. For example, a psychologist who worked for one of the employment agencies used by manufacturers in the Guadalajara region of Mexico wrote that firms intentionally sought workers with little self-esteem or aspiration. The applications of workers involved with labor unions, with relatives in government, or with work experience in the United States were routinely rejected out of hand. Prospective workers were sometimes required to strip naked so they could be checked for tattoos (a sign of rebelliousness), and they were often given pregnancy tests. Such pre-employment tests were illegal under Mexican labor laws, but the law was routinely ignored. In practice, complaining immediately disqualified a job applicant. Yet, having few or no other options for employment, Mexican workers continued to apply for the available jobs. Chinese competition meant there were many more workers than jobs in Mexico.

The situation is even more complex than we have so far described. Most workers in Mexican manufacturing plants come from small towns and villages, where agricultural jobs have been lost as a result of the 1994 North American Free Trade Agreement (NAFTA). NAFTA opened the Mexican market to subsidized U.S. grain exports after its ratification in 1994, and because small Mexican farmers have neither the capital nor the technology to compete with the capital-intensive and subsidized U.S. agricultural producers, most ended up giving up farming. Without local employment opportunities in the traditional farming communities, unemployed workers from rural towns and villages had to accept whatever Mexican manufacturers offer. For many young Mexican workers, a more attractive alternative was to migrate illegally to the United States. Thus, NAFTA not only caused some jobs to be shifted within Mexico, but it encouraged immigrant workers to compete directly with U.S. workers in the U.S. labor market. The recently enacted Central American Free Trade Agreement (CAFTA) is having the same effect. The vicious anti-immigrant rhetoric of politicians in the United States conveniently ignores the role of U.S. agricultural subsidies and NAFTA in expanding illegal immigration to the United States, probably because it is more difficult to just blame foreign immigrants when the complexity of interdependence is taken into consideration.

The full costs and benefits of international trade such as the export of Chinese products made with Jinfeng’s steel are difficult to assess once the social consequences are added to the standard economic gains from trade that economists like to focus on. For example, the social implications of the human migration from Mexico to the United States are substantial. Mexican families are split up, children are not cared for, and rural communities have been reduced to populations consisting disproportionately of children and the grandparents left behind to care for them. In the United States, their illegal status subjects Mexican immigrants to abuse, exploitation, insecurity, and effectively second-class social status not unlike the bottom rungs of a rigid caste system. Many U.S. employers exploit illegal workers because, similar to the desperate workers in Mexican plants, illegal workers are unlikely to complain or join a union. Many people question whether such expansion of international trade, investment, and migration really improves human welfare as some standard economic models suggest.

Even in China, growing income inequality threatens China’s social and political orders because China’s rapid growth has not provided all 1.3 billion Chinese with comparable improvements in well-being. Some regions have grown faster than others, and some people in each region have captured most of the income gains from economic growth. China’s income is today much less equally distributed than it was before the last three decades of rapid growth. Remember, the willingness to work long hours in Jinfeng’s dirty industries for low wages reflects a lack of job opportunities in the Chinese countryside.

International interdependence also has macroeconomic consequences. For example, China’s rapid economic growth slowed in late 2008 and 2009 because the world economy, where the Jinfeng steel plant and all of China’s many industries sold their products, fell into a deep recession that seems to have started in the United States, where a bubble in housing prices burst and sharply reduced the value of mortgage securities and other derivative securities based on those mortgages. The collapse of U.S. housing prices affected the rest of the world because the derivative assets based on the underlying mortgages had been acquired in other countries. As the default rate on U.S. mortgages shot up and the mortgage securities proved to be worth much less than their inaccurate AAA ratings had suggested, balance sheets deteriorated and bankruptcies spread across the economies of Europe, Asia, and other continents. At the start of 2009, it was estimated that 20 million workers in Jinfeng and similar new industrial towns throughout China had lost their jobs and were returning to the countryside. The Chinese government quickly expanded domestic infrastructure expenditures to offset the drop in foreign demand for its products, and it appears that this fiscal stimulus may have spared China from being adversely affected by the rest of the world’s economic recession.

In summary, the different international economic activities normally studied in the field of international economics are interrelated and have broad economic, social, and environmental consequences. In fact, the interdependencies created among countries by trade, investment, finance, and migration imply that countries are no longer in complete control of their own destinies, and the effects of economic change in one country inevitably spill over into other economies. The purpose of this textbook is to not only present the traditional analysis of international economics, but also to extend that analysis in order to recognize the complexity of international economic activity. We will provide the broader perspectives from which we can make sense of the true complexity of international economic activity. As a result, we will arrive at more accurate and more realistic assessments of how international economic activity affects human well-being.

1.2 The Bigger Picture

Fundamentally, international economic integration implies an increase in human interactions over greater distances, across more borders, and between more and different countries. Humans, like all living creatures, have struggled with the choice between expanding or limiting contact with other members of their species. Throughout nearly all of their existence to date, humans lived in small groups and dealt almost exclusively with people they knew well and interacted with on a regular basis. Humans evolved as social animals, but their societies were small.

However, as the economic historian Paul Seabright (2010) describes in his aptly entitled book The Company of Strangers, 10,000 years ago humans transformed their existence with the invention of agriculture:

[O]ne of the most aggressive and elusive bandit species in the entire animal kingdom began to settle down.… [N]ow, instead of ranging in search of food, it began to keep herds and grow crops, storing them in settlements that limited the ape’s mobility and exposed it to the attentions of the very strangers it had hitherto fought or fled. Within a few hundred generations—barely a pause for breath in evolutionary time—it had formed social organizati...